‘DRDGold ‘is probably going to be the safest gold mine going forward, just by the fact that it’s concentrating on surface assets,’ comments Peter Major.

ALEC HOGG: Niel Pretorius is with us in the studio, He’s chief executive of DRDGold. Niel, on the face of it, it looks like you guys produced what you promised us three months ago. You said you are on your way, the rocket is back in form, and yet the share price was down by 5% today. What do you put that down to?

NIEL PRETORIUS: Alec, the share ran hard in the last three or four days. Actually over the last month the share has run hard, and I think shareholders are maybe a little concerned about the drop in production. We suspended operations at ERPM, and that accounted for half of the loss in production. And then at Crown we eventually started mining Top Star…

ALEC HOGG: The drive-in.

NIEL PRETORIUS: That’s right. We stopped mining some of the other reclamation sites prior to mining Top Star, then hit a four-week delay, and that had an impact on volumes. It was an event, it wasn’t trend, but I think maybe the market is a little bit concerned about that.

ALEC HOGG: Let’s just examine that a little. You have stopped mining at ERPM, but the problem there was it was too expensive to mine. I would have thought that if one is looking at things sensibly, that would have been a good thing for shareholders. You are not mining unprofitably any more.

NIEL PRETORIUS: Remember the market’s been aware of the fact we stopped mining at ERPM for quite some time, and maybe that’s already been factored into out share price. We’ll replace the production at ERPM with the Elsburg circuit, which is part of Ergo, bit by bit coming on line now. Hopefully by July/August we would have reached the stage where we would in fact have fully replaced that and ultimately also overtaken that production, and of course at much lower costs.

ALEC HOGG: Something that is interesting that has happened in this quarter, that many people might not have caught up, was that you finally got money back from Brett Kebble. Take us through the story, and why you got R25m – well, not from him, but from what he left behind.

NIEL PRETORIUS: DRDGold shares were used to acquire an asset in Indonesia, and DRDGold decided to walk away from the deal when it became apparent that they never received any value. An action was instituted both here and in Australia for about R77m, and we eventually decided to settle that claim for R25m. That money has finally come in.

ALEC HOGG: It cost DRDGold shareholders R122m initially. Why were you happy to accept so much less?

NIEL PRETORIUS: Well, I think there were concerns about the JCI balance sheet at the time. The merger seemed to be on, then off, then on, so you don’t really know what the financial integrity of the company is. I am not reflecting on that or submitting an opinion, but it’s a five-year-long battle, and a bird in the hand is better than two in the bush, I would imagine. We decided to bring it to an end and take the money.

ALEC HOGG: Did you have to kick in your own legal fees?

NIEL PRETORIUS: We paid out legal fees up until that point, yeah.

ALEC HOGG: So you didn’t exactly make a whole lot of money out of it, but it’s now settled and I guess one less thing for you to worry about.

NIEL PRETORIUS: That’s correct, and we didn’t spend any more legal fees. It was probably a five-week trial that we were heading towards.

ALEC HOGG: Niel, what are you worrying about at the moment? The gold price is over $900/oz, so that’s good news. The rand is strengthening a little, but costs here in South Africa?

NIEL PRETORIUS: Alec, the cost trends are better. Steel’s come down quite a bit. Because the oil price is so low we are not seeing the typical inflation associated with our industry, because everything gets delivered to our mines. So costs have been pretty flat. Obviously electricity could go up quite a bit, water could go up quite a bit. At this point in time I must be quite honest with you, I am very relaxed with where we are with projects that have been coming for the last two, three years, and we are very well positioned.

ALEC HOGG: Well, you have produced good results today. Headline earnings per share up 30%, your operating profits were up 65%; dividends – is that still a little bit far off?

NIEL PRETORIUS: Look, we paid a dividend last year. We will have that discussion again at the next board meeting. We are not going to hold on to surplus funds; I think that is the view of the board. We can’t make any promises now because we don’t know if we will have surplus funds, but we have certain buffers that we want to maintain, certain projects that we want to complete, and whatever is left we are not going to hold on to our shareholders’ cash.

ALEC HOGG: Some of the workers’ representatives might not be too thrilled by the fact that you laid off 1355 workers, and then you show a 30% profit improvement.

NIEL PRETORIUS: Yes. Alec, we went through the consultation process at length, and ultimately the decision to terminate and to part was a consensual one. The union saw, I think, what the challenges were at ERPM, and they realised that we wouldn’t be able to mine there for at least 12 months. And you can’t cover the payroll. We are not intending to spend any significant amount of capital there anytime soon, so it’ll be on care and maintenance for an indefinite period of time. A lot of things would have to happen before we spend capital.

ALEC HOGG: So it is understood by the labour unions that these are two separate issues – that ERPM is a mine on its own, and just couldn’t carry on any more.

NIEL PRETORIUS: Very much so.

ALEC HOGG: Niel, what about the gold price? You guys are quite positive, being an unhedged producer, that the gold price will go higher. Are you seeing conditions ripe for that?

NIEL PRETORIUS: Alec, I was just looking at the screen, and looking at unemployment in the United States, the highest in 16 years. We have a director who believes that hyperinflation is around the corner. Currency volatility is good for our product, so he suggests $900 is the low for the year. In the past he’s only been wrong because he was too conservative. So I’m hoping he’s right.

ALEC HOGG: Which director is this?

NIEL PRETORIUS: James Turk.

ALEC HOGG: Aha. James Turk is a well-known international commentator. Good to have him on your board. Peter Major is a well-known South African commentator, and one of the best minds in mining. Peter, DRDGold I think is one of your favourites?

PETER MAJOR: Man, I think it was your favourite, Alec, but when I look at the graphs here and the performance figures, it’s been the top-performing gold share for the last two years. So whoever chose it, me or you, we chose wisely.

ALEC HOGG: Well, it’s been The Rocket certainly from December, where you could have got the shares at R4. They are at R7.64 today. This set of results – have you had a chance to look at them?

PETER MAJOR: I have, and I must say it’s hard for a dog to change its spots, but this dog is different. And in fact we really can’t call it a dog – it’s known for having very old, very deep, and very difficult gold mines. I went to their presentation just after the Mining Indaba last year and I realised how much they’ve changed and how much they planned on continuing to change. These results really show it and, gee, it’s going to be even more different another quarter or two from now.

ALEC HOGG: Do you ever read much that James Turk writes? Niel reminded us that he is a director, and I am having a look on Moneyweb right now – he bought shares at R4.98 back in June last year, so he obviously put his money behind his thoughts.

PETER MAJOR: You know, you’ve got to give the Americans credit for a few things, and when they punt gold shares, most of the guys who punt gold believe gold – and that means they buy something that is going to give them gearing to gold. And we’ve always known Durban Deep would give you the best gearing – it was just so risky, especially if you thought the gold price was high and wasn’t going to go higher. But they’ve taken so much risk by reducing the underground exposure, and closing ERPM was long overdue. It’s sad, but let someone else try and run it if they think it’s possible. This is going to a safe surface operation.

ALEC HOGG: Peter, what’s your reading of it as an investment opportunity now?

PETER MAJOR: Man, if we can get rid of the history, and we have to – investing and being an analyst you have to get rid of the history when it’s not appropriate, and management has really kept their word here – this is probably going to be the safest gold mine going forward, just by the fact that it’s concentrating on surface assets.

ALEC HOGG: If you are looking for a gold share that you can put in your bottom drawer, or perhaps not quite the bottom drawer, because it’s not that kind of share, DRDGold – you heard what Peter Major had to say, and Niel Pretorius is full of confidence as well. If the gold price is going through $1000, this one could go a lot higher. As Niel Pretorius went out of the studio he said it’s not really a share for widows and orphans, but he says people who watch the gold price closely can get on the DRDGold bus.

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